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On Apr 20, the oil sector was dealt with the worst blow in history thanks to the novel coronavirus. The future price of the U.S. crude oil — the West Texas Intermediate (WTI) — for May delivery turned negative for the first time ever. Consequently, Wall Street closed sharply lower as investors scurried for safe-haven assets like gold in apprehension of any recovery in the U.S. and the global economy.
Gold Glitters on Crude Oil Price Collapse
On Apr 20, the price of WTI crude for May delivery lost all its value finishing at negative $37.63 per barrel. This simply means that to sell one barrel of crude oil, producers would have to pay $37.63 to the buyer in addition to the physical commodity (crude oil). This unprecedented situation occurred owing to sheer lack of demand.
Imposition of partial or full lockdowns across the world resulted in a near-complete stagnation of aviation, road and sea transport. These are major sources of oil demand. Moreover, manufacturing industries are mostly shut all over the world, making the situation worse. Consequently, the storage capacity of refineries is full, resulting in virtually zero demand for crude oil.
Notably, the crude oil industry commands a large part of the U.S. economy. U.S. oil producers spend around $130-$140 billion per annum in capital expenditure. The industry also provides a good chunk of high-paying jobs. As a result, collapse of crude oil price is likely to have a significant impact on the U.S. economy.
Evidently, the three major stock indexes — the Dow, the S&P 500 and Nasdaq Composite — tumbled 2.4%, 1.8% and 1%, respectively. However, the decline in equities comes as a boost to precious metals, especially to gold.
The price of the yellow metal, considered as the best safe-haven investment option, for June delivery gained 0.7% to close at $1,709.50 per ounce. Gold price witnessed a low of $1,576 per ounce on Mar 31. After that it rallied to $1,788.40 on Apr 14.
The decline in gold price in March along with equities was partly attributed to the fact that investors sold gold to meet the margin money in equities which were ravaged by the coronavirus-induced mayhem. Another reason was that imposition of lockdowns raised questions about gold mining. Gold prices again started falling after Apr 14, once the three major stock indexes came out of the bear territory as a result of an impressive stock market rally in the last four weeks.
Momentum Likely to Continue
Buying pressure on gold is likely to remain robust with investors focusing on precious metals as a store of wealth and hedge against market turmoil at least for the next few months. The global economy is still not out of danger although the pace at which coronavirus is spreading seems to be stabilizing.
Meanwhile, almost all central banks are pursuing easy monetary policies in order to inject more liquidity into the system. Fed has reduced the benchmark interest rate to zero. The ECB and the Bank of Japan are maintaining a negative interest rate policy for a long time. Lower interest rates decrease the opportunity cost of holding non-yielding bullion, making gold cheaper for investors holding other currencies.
Our Top Picks
At this stage, it will be prudent to invest in gold stocks with strong growth potential. We have narrowed down our search to five such stocks. Each of these stocks carries either a Zacks Rank # 1 (Strong Buy) or 2 (Buy).
The chart below shows the price performance of our five picks in the past month.
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Kinross Gold Corp. (KGC) is engaged in the acquisition, exploration, and development of gold properties in the United States, Russia, Brazil, Chile, Ghana and Mauritania. The Zacks Rank #1 company has expected earnings growth of 41.2% for the current year. The Zacks Consensus Estimate for current-year earnings has improved by 11.6% over the last 60 days. The stock price has rallied 56.2% in the past month.
Sandstorm Gold Ltd. (SAND) is focused on completing gold purchase agreements with gold mining companies that have advanced stage development projects or operating mines. The Zacks Rank #1 company has an expected earnings growth rate of 44.4% for the current year. The Zacks Consensus Estimate for current-year earnings has improved by 7.7% over the last 60 days. The stock price has surged 33.1% in the past month.
Gold Fields Ltd. (GFI) is one of the world's largest unhedged gold producers with operating mines in South Africa, Ghana, and Australia. The Zacks Rank #1 company has an expected earnings growth rate of 31% for the current year. The Zacks Consensus Estimate for current-year earnings has improved by 37.5% over the last 60 days. The stock price has climbed 45.1% in the past month.
Alamos Gold Inc. (AGI) is engaged in acquisition, exploration, development and extraction of gold deposits in North America. It also explores for silver and precious metals. The Zacks #2 company has an expected earnings growth of 30% for the current year. The Zacks Consensus Estimate for current-year earnings has improved by 18.2% over the last 60 days. The stock price has soared 36% in the past month.
B2Gold Corp. (BTG) explores and develops mineral properties for gold deposits in Nicaragua, the Philippines, Mali, Colombia, Burkina Faso and Namibia. The Zacks Rank #2 company has expected earnings growth of 214.3% for the current year. The Zacks Consensus Estimate for current-year earnings has improved by 2.3% over the last 60 days. The stock has jumped 50% in the past month.
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